Lending guidelines were recently loosened on cash out refinance transactions. If you’re looking to refinance and pull out funds for home improvement, or another project, here’s what you should know if your loan size exceeds $417,000.
Mortgage loans bigger than $417,000 are going to cost more. Here’s why: when a mortgage loan exceeds $417k the loan moves from ‘conforming‘ to ‘conforming high balance‘ which contains a pricing adjustment for delivery to Fannie Mae or Freddie Mac. Additionally, when you elect to cash out refinance another pricing adjustment for cash-out comes into the equation driving the terms higher than if your loan was 417k or lower without cashing in your equity.
Loan to value adjustments
If you attempted a cash out refinance on your home for a loan greater than $417k in 2015, you would have been limited to a 70% loan to value with higher rates. To put this in perspective, a 30 year mortgage at the end of 2015 was 4% assuming a loan done as rate and term i.e. not pulling any money out. That same loan would cost a whopping 4.625% all other factors being equal. You heard that right .625% more in rate just for pulling cash out versus doing a rate and term refinance under the same 70% loan to value scenario. Freddie Mac offered the option of going as high as 80% loan to value with even more heavy fees on loans in excess of 417k.
New guidelines allow competitive pricing all the way to 75% loan to value with a minimum credit score at least 700. Better credit score of course always yield a better rate and fee combination as well. These revised changes allow for more flexibility at 75% loan to value and 80% loan respectively. These changes incorporate cash outs on loans to the maximum county conforming high balance loan limit. In the county of Sonoma, California this means cash outs all the way to $554,300. Other counties such as San Francisco offer cash out loan sizes to a whopping $625,500.
How jumbo loans come into play
Jumbo home loans are any loan size $1 over the maximum county high balance loan limit. Mortgage lenders examine the financial picture of applicants looking for big mortgages far more closely than Fannie or Freddie Mac loans, and for good reason, they are riskier to the banks.
Most Jumbo mortgage loans will allow cash out as high as 70% loan to value with at least a 700 credit score or better along with good credit and income history.
Some other factors to consider when researching mortgage loan programs and cash out scenarios:
- If you are combining a first and second mortgage into one be on the lookout. Fannie Mae and Freddie Mac consider second mortgages taken out after you bought the home to be ‘cash-out’ subjecting you to stronger home equity requirements. Loans insured by the FHA do not have this limitation and will go to 97% loan to value if your intention is only to combine and first and second into one. Fannie and Freddie will refinance your loan as rate and term which allow higher loan to values (less equity) if the first the second mortgage was acquisition debt, meaning the first and second mortgage was used to purchase the home.
- If your first and second mortgage combined exceed $417k you may be able to be put on a jumbo mortgage loan program allowing you to refinance your loan as a rate and term refinance. The requirement is no draws or advances on your second mortgage in the last 12 months.
- Unique strategy – let’s say a life event of some sort has presented itself causing the need to borrow money. You may be in luck even if you’re in a tight situation. A sharp mortgage professional could help you structure that cash out refinance, and obtain the funds. Life event is completed. If it is set properly, down the road your lender can move you into a no points, no fees refinance under a ‘rate and term loan’ allowing you to essentially have the benefit of both worlds; getting the cash out while procuring super favorable rates and without fees.
Get the full picture when deciding to begin refinancing. This means looking beyond just the rate and fees and into the over mechanics of your loan. Things like credit score, occupancy, loan program, loan term, loan size, second mortgage, property type and loan to value all play a role in your rates and fees anyway so be sure you fully understand every component.
Looking to refinance? Begin by getting a free mortgage rate quote online today.
